(weighted average cost of capital)ABBC Inc- operates a very successful.docx

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(weighted average cost of capital)ABBC Inc. operates a very successful chain of yogurt and coffee shops spread across the southwestern part of the United States and needs to raise funds for its planned expansion into the Northwest. The firmâ€™s balance sheet at the close of 2009 appeared as follows: At present the firmâ€™s common stock is selling for a price equal to 2.5 times its book value, the firms investors require an 18 percent return, the firms bonds command a yield to maturity of 8 percent, and the firm faces a tax rate of 35 percent. At the end of the previous year ABBCs common stock was selling for a price of 2.5 times its book value, and its bonds were trading near their par value. a. What does ABBCs capital structure look like? b. What is ABBCs weighted average cost of capital? c. If ABBCs stock price were to rise such that it sold at 3.5 times its book value and the cost of equity fell to 15 percent, what would the firms weighted average cost of capital be (assuming the cost of debt and tax rate do not change)? Solution Ahftg .

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Quantum Technology had $646,000 of retained earnings on December 31, 2013. The company paid common dividends of $34,800 in 2013 and had retained earnings of $506,000 on December 31, 2012. a. How much did Quantum Technology earn during 2013? Earnings available to common stockholders $ b. What would earnings per share be if 42,100 shares of common stock were outstanding? (Round your answer to 2 decimal places.) Earnings per share Botox Facial Care had earnings after taxes of $362,000 in 2012 with 200,000 shares of stock outstanding. The stock price was $81.80. In 2013, earnings after taxes increased to $450,000 with the same 200,000 shares outstanding. The stock price was $95.00. a. Compute earnings per share and the P/E ratio for 2012. (The P/E ratio equals the stock price divided by earnings per share.) b. Compute earnings per share and the P/E ratio for 2013. c. Why did the P/E ratio change? Amigo Software Inc. has total assets of $864,000, current liabilities of $166,000, and long-term liabilities of $149,000. There is $96,000 in preferred stock outstanding. Thirty thousand shares of common stock have been issued. a. Compute book value (net worth) per share. b. If there is $55,300 in earnings available to common stockholders and the firm’s stock has a P/E of 28 times earnings per share, what is the current price of the stock? c. What is the ratio of market value per share to book value per share? The Rogers Corporation has a gross profit of $707,000 and $329,000 in depreciation expense. The Evans Corporation also has $707,000 in gross profit, with $44,800 in depreciation expense. Selling and administrative expense is $176,000 for each company. a. Given that the tax rate is 40 percent, compute the cash flow for both companies. b. Calculate the difference in cash flow between the two firms. A-Rod Fishing Supplies had sales of $2,010,000 and cost of goods sold of $1,350,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 5 percent of the total assets of $4,070,000. What was the firm’s operating profit? Jerry Rice and Grain Stores has $4,040,000 in yearly sales. The firm earns 4 percent on each dollar of sales and turns over its assets 2 times per year. It has $102,000 in current liabilities and $381,000 in long-term liabilities. a. What is its return on stockholders’ equity? b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 3.00, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. A firm has net income before interest and taxes of $156,000 and interest expense of $25,500. a. What is the times-interest-earned ratio? b. If the firm’s lease payments are $49,500, what is the fixed charge coverage? The balance sheet for Stud Clothiers is shown next. Sales for the year were $3,190,000, with 75 percent of sales sold on credit. STUD CLOTHIERS Balance Sheet 2 ...

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